This section addresses impairment guidance related to construction work in progress and utility plant. As summarized in Figure UP 18-2, the recognition and measurement models vary depending on whether the impairment relates to an abandonment, disallowance of recently completed plant, or other plant impairment.
Figure UP 18-2
Accounting for impairments of utility plant
Initial measurement
Subsequent measurement
Abandonments (UP 18.7.1)
  • Loss on abandonment is measured based on difference between carrying value and present value of future cash flows (ASC 980-360-35)
  • Any amounts to be recovered are recorded as a regulatory asset
  • Record subsequent changes in recovery amounts as an adjustment to the regulatory asset
Disallowances of recently completed plant (UP 18.7.2)
  • ASC 980-360-35 requires loss recognition of any disallowance as a reduction of the utility plant balance
  • Record subsequent regulatory recoveries as utility plant
Other utility plant impairments (UP 18.7.3)
  • ASC 360 two-step impairment model requires assessment upon a triggering event; any impairment is measured based on fair value
  • Any impairment is a reduction to the utility plant balance
  • ASC 360 does not allow subsequent increases in plant
  • Record regulatory recoveries, if any, as a regulatory asset
View table
Because of the differences in recognition and measurement among the accounting models, determining which guidance applies is critical to the measurement and recognition of a potential impairment of regulated utility plant. Figure UP 18-3 summarizes key questions to consider in determining the appropriate accounting model.
Figure UP 18-3
Determining which accounting model to apply to an impairment of regulated plant or construction in progress
Considerations in applying these models are discussed in the following sections. See UP 17.8.3 for further information on utility plant impairment when a regulated utility is discontinuing the application of ASC 980.

18.7.1 Abandonments

A regulated utility may abandon construction of utility plant or plant in service due to various factors, including increasing costs of completing construction, expected declines in demand, or increased operating costs due to regulatory or other changes (e.g., changes in emission laws). ASC 980-360-35-1 through 35-8 provide guidance on accounting for abandonments by regulated utilities.

ASC 980-360-35-1

When it becomes probable (likely to occur) that an operating asset or an asset under construction will be abandoned, the cost of that asset shall be removed from construction work-in-process or plant-in-service.

A regulated utility should recognize a loss on abandonment when it becomes probable that all or part of the cost of an asset will be disallowed from recovery in future rates and such amount is reasonably estimable. The amount, if any, that the regulated utility expects to recover should be recorded as a new regulatory asset.
As discussed in ASC 980-360-35-3, the new regulatory asset is determined based on the present value of the future revenues for the allowed recovery of abandoned plant. The discount rate used to calculate the present value of future revenues should be the regulated utility’s incremental borrowing rate. Regulated utilities should also consider the recovery of any asset retirement obligation in connection with the abandoned plant. Figure UP 18-4 highlights the concepts for calculating the value of the regulatory asset for an abandoned plant that will be recovered in rates. The measurement of the regulatory asset and the subsequent amortization will depend on whether the regulator permits full, partial, or no recovery of return.
Figure UP 18-4
Recognition and measurement of a regulatory asset recognized in connection with a plant abandonment
Full return likely
to be provided
Partial or no return
likely to be provided
Initial measurement of the new regulatory asset
Carrying basis of the abandoned plant less the amount of any cost disallowance
Present value of the future revenues expected to be provided to recover the allowable cost of the abandoned plant
Accounting for the regulatory asset during the period between the date the regulatory asset is recognized and the date recovery begins
Asset is increased for carrying charges; calculated using allowed overall cost of capital in the jurisdiction where recovery will be provided
Carrying charge calculated using rate used for the present value calculation
Amortization pattern during the recovery period
The same manner as that used for ratemaking purposes
In a manner that will produce a constant return consistent with the rate used for the present-value calculation
The guidance results in the regulated utility recording a loss in the income statement for any amounts that ultimately are not recovered through future rates, including:
  • Any portion of the cost of the abandoned utility plant that is disallowed
  • Any disallowance of return (i.e., a partial or no return)
The regulated utility should record the new asset and any loss to be recognized when the loss is probable and the amount is reasonably estimable. Prior to receipt of a regulatory order, determining whether to apply the abandonment accounting model may be a matter of judgment. In most cases, the abandonment model will be applied at the time the initial rate order is received. However, the lack of a regulatory order would not preclude accounting for the abandonment if the loss is probable and reasonably estimable. Factors to consider include the nature of the abandonment, the regulated utility’s historical experience and past practice, and the current policies of the regulator with respect to abandonments.
If the criteria for loss recognition (i.e., the loss is probable and reasonably estimable) are not met before or at the time of a rate order (because the regulator does not finalize the amount and timing of the future revenues to be provided), the loss should not be recognized at that time. The loss should be recognized once the future cash flows are probable and reasonably estimable.
If new information becomes available that indicates that the estimates used to record the new regulatory asset have changed, the regulated utility should adjust the amount of the asset recorded. However, no adjustment should be made as a result of changes in the regulated utility’s incremental borrowing rate. Any subsequent change to the estimate of the abandonment loss should be recorded as a gain or loss in the income statement.
Question UP 18-6
Does the abandonment accounting model apply to all utility plant, including plant in service, or only to construction in progress and newly completed plant?
PwC response
ASC 980-360-35-1 states that the abandonments guidance applies to “an operating asset or an asset under construction.” In the Basis for Conclusions of FASB Statement No. 90, Regulated Enterprises—Accounting for Abandonments and Disallowances of Plant Costs—an amendment of FASB Statement No. 71 (FAS 90), paragraph 43, the FASB provided the following context:

Excerpt from FAS 90, paragraph 43

Recently, abandonments of plants under construction have become more common, and some utilities have abandoned plants during the later stages of construction. In many cases, the cost of abandoned plants is much greater than in the past.

This paragraph suggests that the guidance was primarily intended to address issues associated with plants under construction; however, the final guidance specifically scopes in “operating assets.” Therefore, we believe the guidance on abandonments should be applied to all abandoned plants, not just those that are newly completed or for which construction is in progress.
Question UP 18-7
What is the impact on the accounting for an abandonment if the plant will continue to operate for some period after the criteria for recognition has been met?
PwC response
As a result of ongoing changes in environmental regulations, many regulated utilities are contemplating abandoning plants that were expected to be in service for much longer periods. In some cases, the criteria for abandonment accounting may be met for some period before the regulated utility expects to physically abandon the facility. However, the guidance on abandonments indicates that the loss should be recorded and amounts to be recovered, if any, should be reclassified to a regulatory asset at the time the abandonment is probable. Therefore, a question arises as to the accounting during the period the plant is still in operation.
The Basis for Conclusions of FAS 90 discusses abandoned plants.

Excerpt from FAS 90, paragraph 44

The Board … has concluded that an abandonment changes the nature of the asset. A plant under construction is expected to produce utility services that have value. An abandoned plant can produce no services. Any value that results from the abandoned plant is limited to the revenues that will be furnished through the sales of services provided by other plants.

This paragraph highlights the difference between a utility plant asset, which is providing revenue through operations, and cost recovery associated with an abandoned plant. Consistent with this concept, we believe it would be acceptable to reclassify to a regulatory asset only that portion of the recovery expected to occur after the plant is abandoned. The regulated utility should record the reclassification and any related loss at the time the abandonment becomes probable, consistent with guidance in ASC 980-360-35. The balance still classified in utility plant should be recognized over the period remaining until the plant is abandoned. Therefore, in such situations, an adjustment to the estimated life of the asset and, accordingly, the rate of depreciation, is likely appropriate to recover the asset while it is still providing service. Income tax considerations

Although the net loss on an abandonment is determined by discounting future after-tax revenues, the presentation of the loss on a net-of-tax basis is not allowed in accordance with ASC 980-740-25-1(a). As a result, the net loss on abandonment is grossed up for presentation purposes. Reporting entities should refer to the guidance in ASC 980-360-35-9 through 35-11 and ASC 980-360-55-2 through 55-13 (Example 1) when evaluating the income tax effects.

18.7.2 Disallowance of recently completed plant

Some regulators require construction or management audits to assess whether expenditures incurred in construction projects have been prudent and should be included in rate base. As a result of these audits or based on other factors, regulators may partially or totally disallow capitalized construction costs from rate base, cost-of-service recovery, or both. ASC 980-360-35 provides guidance on the accounting for disallowances of recently completed plants and requires loss recognition of any disallowed amounts on a dollar for dollar basis. This model is different from the impairment model under ASC 360, which requires a recoverability test and then measures impairments by comparing the carrying value of the utility plant to its fair value. Due to the differences in loss recognition under the two models, the determination of when the guidance in ASC 980-360-35 applies is important.
In accordance with ASC 980-360-35-12, when a regulated utility concludes it is probable that part of the cost of a recently completed plant will be disallowed for ratemaking purposes, and a reasonable estimate of the amount of the disallowance can be made, it should record such amount as a loss. In addition, a regulated utility may become aware of a disallowance prior to construction being completed, in which case the utility should recognize a loss at that time if the disallowance is probable. ASC 980-360-35-12 also requires recognition of a loss if part of the cost of a recently completed plant is explicitly but indirectly disallowed. An indirect disallowance occurs when, for example, no return or a reduced return on investment is permitted on all or a portion of the new plant for an extended period of time.
As discussed in ASC 980-360-55-29, to determine the loss resulting from an indirect disallowance, the regulated utility should first calculate the present value of the future revenue stream allowed by the regulator by discounting the expected future revenues using the last allowed rate of return. The utility should compare this amount to the recorded plant amount and record the difference as a loss. The utility should depreciate the remaining asset consistent with the ratemaking approach and in a manner that would produce a constant return on the undepreciated asset equal to the discount rate. Any subsequent changes in regulatory recovery should be recorded as an adjustment to the utility plant balance.
Question UP 18-8
What is meant by “recently completed plant”?
PwC response
We have interpreted “recently completed plant” as utility plant, or an addition to utility plant, that has been placed in service but that has not been through an initial rate case. We do not believe the length of time between completion of the plant (or addition) and finalization of the rate case is a factor in the interpretation of what should be included within recently completed plant.
Question UP 18-9
Should the accounting for disallowances of costs of recently completed plants also be applied to cost disallowances not related to a recently completed plant?
PwC response
No. Prior to the codification, in the Basis for Conclusions of FAS 90, paragraph 63, the FASB considered requiring application of the loss recognition accounting to all cost disallowances by a regulator, whether related to recently completed plant or other situations. The FASB decided to limit the guidance on disallowances to the specific issues that caused it to add the project to its agenda (i.e., recently completed plant). See UP 18.7.3 for a discussion of other impairments of utility plant.
Question UP 18-10
In what situations would a disallowance of part of the cost of a recently completed plant indicate that a regulated utility should consider discontinuing the application of ASC 980?
PwC response
The fact that a regulator is unwilling to approve rates based on the current cost of service may call into question the basic premise of ASC 980. Specifically, ASC 980-360-35-13 and 35-14 indicate that when a regulator orders a disallowance without a specific finding as to excess capacity or timing of construction, the rate order raises questions as to whether the regulated utility is being regulated based on its own cost of service.
In our view, a plant disallowance is ordinarily an unusual, nonrecurring event and is only one factor to be considered in the continued application of ASC 980. Reporting entities faced with a disallowance of recently completed plant or other regulatory deferrals, such as a phase-in plan, should evaluate factors similar to those considered when recognizing regulatory assets (e.g., state regulatory history, cost forecasts, and the proposed length of the recovery period). The regulated utility should also consider whether it will recover substantially all of the carrying values of its assets and periodic operating costs through the regulatory process on an ongoing basis. See UP 17.2 for further discussion on the criteria for application of ASC 980.

18.7.3 Other utility plant impairments

ASC 980-360 includes specific guidance on accounting for abandoned utility plant and disallowances of recently completed plant. If a regulated utility has a potential impairment of utility plant that does not fall within the scope of ASC 980-360, it should follow the guidance for impairment of long-lived assets in ASC 360.
As described in UP 18.7.2, the distinction between a disallowance of recently completed plant and an impairment of utility plant in service is important due to differences in the models applied to recognize and measure any loss. In addition, long-lived assets that have been impaired in accordance with the guidance in ASC 360 may not be reestablished or written up in subsequent periods. The regulated utility should record any subsequent amounts allowed by the regulator through a specific rate action as a regulatory asset, if the criteria of ASC 980-340-25-1 are met.
Example UP 18-4 illustrates regulatory recovery of impairment costs.
Impairment analysis of plant
In March 20X1, Rosemary Electric & Gas Company’s regulator adopts a deregulation plan for the jurisdiction in which REG operates. As a result, REG determines that the generation portion of its business no longer qualifies for application of ASC 980. As part of the transition plan to competition, the regulator permits full recovery of the excess carrying value of REG’s generation plants above current market value as part of non-bypassable competition transition surcharge to all distribution customers. Assume the following:
  • Plant carrying value - $1 billion
  • Plant market value - $600 million
  • Competition transition charge - $400 million

How should REG record its regulatory recovery of impairment costs?
As part of the discontinuation of ASC 980, REG would perform an ASC 360 impairment analysis of its generation assets by comparing the carrying value to the market cash flows and determine that there is a $400 million impairment.
REG would record a loss on plant of $400 million, which is fully offset by a new competition transition charge regulatory asset.
In this case, the loss recorded would be wholly offset by recovery through the regulated portion of the business. Whether a regulatory asset will be recognized in these situations depends on the regulator’s treatment of the recovery of these costs and whether the specific recognition criteria are met (see UP 17.3).
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